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WAGE INEQUALITY AND AGGREGATE DEMAND

August 15, 2017

WAGE INEQUALITY AND AGGREGATE DEMAND

My followers have been subjected to dozens of my posts dealing with wage inequality, which I consider our number one domestic problem, and I am continuing to write on this tragic failure in policy for good reason, since nothing is being done to ameliorate the situation. My followers know when there is less money in the hands of consumers that aggregate demand falters for the simple reason that such consumers don’t have the money to go to market to buy the goods and services produced by our economy (and that of others brought to our market from China and other such low-wage jurisdictions by the likes of Wal-Mart and other low-wage American corporations). This is a recipe for an underperforming domestic economy, one on the persistent edge of recession which, when added to politically-inspired austerity economics, is costing America trillions in production lost forever and not recoverable even with a change to Keynesian economics, which we should be practicing rather than the dead end austerity economics foisted off on us by a Republican Congress we are currently practicing.

Median wages as adjusted for inflation have not moved for some forty years even though the Dow has zoomed into the stratosphere and is currently hovering around the 22,000 mark, largely due to corporate hijacking of not only wages but worker productivity as the 1 percent hogs virtually all of the economy’s income and wealth and leaves the rest of us awaiting the next recession.

This post varies a bit from my usual wage inequality complaints in that I am going to quote language from an academic to bolster my continuing complaint in re wage inequality. The book, Economic Justice and Democracy, by economics professor Robin Hahnel, published in 2005, when the injustice of wage inequality was already in full swing (and still is), explains why wage inequality is destructive of demand in the marketplace. Hahnel feels that capitalism is not doing the job, and I agree that as presently practiced he is correct, but I am not ready to displace capitalism in favor of some other “ism” as he would, not yet, because I think it is a system that can work if appropriately regulated and reformed for the public good and not just another bounce in the Dow as the hijacking of worker wages and productivity by the rich and corporate class has been doing for some forty years.

I will quote extensively from his book in which he is saying the same things I have been saying but with an academic fervor I do not possess. With a single degree in economics, I am an amateur. Hahnel is a pro, and though a bit to the left and not a Stiglitz or a Piketty, his is a strong voice for economic justice.

Thus, he writes: “In capitalism the low road growth strategy is to suppress wages to increase profits and hope the wealthy will plow their profits back into productive investments that expand the capital stock so as to increase economic productivity and potential GDP. Besides being highly inequitable, this strategy runs the risk that the wealthy will not invest their profits to expand the domestic capital stock but consume them, save them, or worse yet, send them abroad. In the latter two cases, not only will the profits not be used to add machines to the capital stock, aggregate demand may falter and reduce actual production even further below a stagnant potential GDP.”

Amen! We have seen the effects of our financial sector’s use of domestic profits to bankroll multinational American corporations who go to China and other low wage jurisdictions in search of cheap labor to assemble goods (and now services) for consumption in our country free of tariffs and import taxes via trade treaties (written by American corporations), all under the guise that such taxes and duties amount to protectionism, even though China and others are engaging in currency manipulation and subsidization of their exports which, along with their cheap slave labor costs, puts American labor at a competitive disadvantage of the first order. Cheap foreign labor costs are thus imported into America and have a depressing effect on wages paid to Americans, who are often threatened by their employers that they either take less wages and no pensions etc. or see their jobs go to Mexico or elsewhere, and grandstanding politicians who pretend that they are going to reverse this situation are blowing hot air. “Corporations,” as a former CEO once noted, “are in the business of making money and not babysitting the American economy.” He’s right; that’s why they need regulation.

Hahnel further notes that “The high road to growth in capitalism is to raise wages to keep aggregate demand high, trusting that if profitable sales opportunities exist capitalists will find ways to expand capacity to take advantage of them. Besides being more equitable, this strategy minimizes the risk of lost output due to a lack of aggregate demand, and reduces unemployment in economies where chronic underemployment is a major social problem.” I couldn’t (and haven’t) said it better – he is right on.

If, of course, there are too little savings to loan to businesses that want to expand their productive capacity, or that capitalists will go on strike demanding higher return on their investments, either of which could lead to recession if not worse, then there’s the rub. Laissez faire economists in their worship of the market will allow all of us to take the hit for the economic wrongdoing of the few and wait for the “magic of the market” to realign the economy. Keynesians such as Stiglitz and Piketty would have government provide public investment and employment to replace falling private investment and employment if capital goes on strike. (See FDR and the New Deal, where such Keynesian tactics were employed, resulting in some forty years of prosperity with wage equality and corporate profits rising in tandem marked by a burgeoning middle class, unlike now, where corporate profits are rising but median wages adjusted for inflation are stagnant and the middle class is evaporating.)

Hahhel writes that “The only golden age capitalism has ever known was during the forty years when the Keynesian program was ascendant, and the only capitalist economies where substantial segments of the workforce ever rose to middle-class status were economies guided by these policies.”

He is right to a fault. Philosophically speaking, why should the entire nation be subject to recession or even depression because we have to wait on the “market” to do its thing? If for any reason there is not sufficient capital investment by private sources to make the economy hum, then why not wax Keynesian and provide public investment and employment to avoid the downturn which, incidentally, the “market” may well have caused? What’s the difference where the investment funds come from when the real problem is how to provide investment to keep the economy on an even keel? Socialism? No. Investment savvy? Yes. Can’t be done? We already have, with forty years of Keynesian policies that led to (per Hahnel) the “golden age of capitalism.” My complaint in this connection is why do we keep on losing when we know how to win? Could it be subordination of the common good to the avarice and greed of the financial sector not designed to “baby sit the American economy?” Nah! Perish the thought.

In summary, Hahnel tells us how to solve the present dilemma: “Subordinating finance to the service of the real economy, rather than the reverse, pursuing full-employment fiscal and monetary policies and intelligent industrial policies, and embracing a wage-led, rather than profit-led growth strategy is nothing more than a full Keynesian program.” He is right. Such a strategy, as we have seen, will lead to an explosion in aggregate demand, the final arbiter of economic growth, and the reincarnation of the middle class. What’s (other than greed) not to like for those of us in the 99 percent?     GERALD       E

 

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